TP14. The Economics of Robinson Crusoe

A simple economy.

The simplest kind of human economy is one person living in isolation. Many years ago, Daniel Defoe told the story of Robinson Crusoe shipwrecked on an island. The story, although fictional, is based on the experiences of an actual castaway. In this article we will vary and embellish the story somewhat, but will keep to the essential theme.

The island, and the things Crusoe found there, are examples of “!and”. The word “land” is used in different ways for different purposes, but in this article we will use the word, as did the “classical economists” to mean natural resources of all kinds. No human being has made “land”, but without it nobody can live. If Robinson Crusoe wished to avail himself of “land”, he had to do something about it. He might collect fruit to eat, or wood to make a hut or a fire. The effort he had to use is called “labour”. The wood and fruit he secured are examples of what is called “wealth”.

 Some of the “wealth” which Crusoe secured was used in a special way. He made nets out of vine-like plants for catching fish. He shaped sticks for digging the ground to grow vegetables. These nets and digging sticks were designed to help him acquire more “wealth”. “Wealth” which is used for creating more “wealth”, like these nets and sticks, is called “capital”.

Crusoe and the modern economy 

In our modern society, exactly the same “factors of production” exist as in Crusoe’s simple economy. We still require “land” for all our production. We still have to apply “labour” to “land” in order to make use of it, though today much of the “labour” we use is mental rather than physical. We still create “capital” in order to increase our “wealth”, though our modern “capital” includes complicated things like machines and factories.

 There is, however, a fundamental difference between “land” and “capital”, which must have been obvious to Robinson Crusoe but is missed by many economists and politicians today. The quantity of “land” is fixed and cannot be increased. “Capital”, and other forms of “wealth”, can be created in almost limitless quantities if one is able to use “labour” on “land”. If there is enough demand, it is possible to create a million cabbages or cars or computers, but there is no way of creating “land”. As Mark Twain joked many years ago, “They ain’t making it no more.” The fact that many economists and politicians treat “land” and “capital” as if they were the same kind of thing leads to all kinds of trouble.

Man Friday arrives.

In Defoe’s story, somebody else, who was called Man Friday, arrived on the island. The relations between Robinson Crusoe and Man Friday throw important light on the workings of economics. One might have thought that they would quickly make arrangements for mutual advantage. Crusoe might, for example, have offered to lend Friday his nets, in exchange for which Friday would give him a share of the catch. In economic terms, Friday would be paying “interest” on Crusoe’s “capital”, to mutual benefit.

But we are told that Crusoe made an astonishing claim: arguing that, as he arrived there first, the island belonged to him! More astonishingly still, Friday accepted the validity of Crusoe’s claim. Man Friday had nowhere else to go, and without Crusoe’s permission he couldn’t live. For practical purposes, he was Crusoe’s slave.

 The moral

Observe that this slavery turned, not on Crusoe’s claim to “capital” or other kinds of “wealth” which he had produced, but to “land”, which neither of them had produced. If the two men had recognised that each had equal rights to the island and its natural products, there could have been no question of one claiming to be master over the other.

 This principle applies not only to the simple, two-person, society which Defoe described, but to any modern society, however complex. There is, however, one enormous difference between the two-person island and a modern society. While Crusoe and Friday could have agreed to roam freely over the island (reserving, perhaps, tiny patches of it which each of them might use for siting his hut, or as a vegetable patch), there is no way in which everyone can have freedom to roam where he likes in contemporary Britain. Some bits are marked off as houses and gardens, or as factories or farms or schools, and life would be intolerable if anybody could go just wherever he liked. And why, indeed,  should anybody be authorised to use the buildings or cultivated fields which owe their present character to what somebody else has done?

 So the great bulk of the country is necessarily marked off as the property of particular people or groups of people, who have the right to exclude others from its use. Even the bits which are not marked off in that way – like roads and other pieces of public land – are governed by rules saying what people may or may not do when using them.

 The value of land

Is there any way of reconciling the principle that everybody has an equal right to the “land” of the country with the right of people to the structures which they or their predecessors have put on “land”, and the consequential necessity of dividing up most of the “land”?

 Yes there is. We can arrange that anybody who wants to keep the exclusive right to use a particular piece of “land” – like my claim to the site of my house and garden, or a commercial firm’s claim to the site on which it has built a factory or a shop – should retain that right, but should be required, in return, to pay to the community each year the annual value of the “land” over which he desires a monopoly.

The value of a piece of “land” – what people are prepared to pay for the right to occupy it – varies enormously. It is affected by such factors as its fertility; the views which it commands; ease of access to places which the owner might wish to visit such as shops, places of work, bus or train routes, churches, schools and so on. The value of a piece of land near a growing town may be greatly influenced by whether or not the local authority is prepared to allow houses to be built there. “Land values” also vary over time. In times of economic prosperity, for example, “land” suitable for housing, shops or factories is likely to be much more valuable than in times of economic depression. All of these things relate to what other people want, and not to anything which the owner has done.

 These “land values”, which have been created not by the owner but by other people, can be collected by the community in a simple way. All “land” which is in private hands – houses, shops, factories, farms and so on – will first be valued. That valuation will consider the “land” only, and will ignore the value of all “improvements” which people have put on it – like buildings, growing crops and so on. Professional valuers assure us that this valuation will be a relatively cheap and easy process – always provided that a lot of unnecessary questions are not asked of the landowner. As “land values” vary over time, it will be necessary to revise the valuation periodically – perhaps every year.

Once the “land” has been valued, a tax will be levied, related to that valuation. At first the tax will be small, but as time goes on the proportion of “land values” which will be collected in this way will be gradually increased. This, of course, will not mean that taxpayers as a whole will be required to pay more money, because as more and more money is raised through “land value taxation” (or LVT), other taxes like Value Added Tax (VAT) or Income Tax will be simultaneously reduced.

 The overall effect of LVT will be that, although the ownership of “land “ will not be disturbed, the value of “land” will accrue to the community, while at the same time people will be taxed much less on such items as what they receive for working, or the cost of the goods and services they have to buy.

In other Topic Papers of this series, we explain various advantages which will accrue from LVT – how, for example, it will reduce poverty and unemployment; how it will improve our environment; how it will make the boom-slump cycle much less violent than it is today; how it will help the householder, and so on idea to go back to first principles.